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Behavioral and personnel economics

Articles in behavioral economics discuss the emotional and cognitive factors that influence the decisions of actors, in particular employers and employees. Personnel economics analyzes the internal organizational strategy of the firm and the human resource management practices chosen to pursue that strategy.

Successful policies for helping the unemployed need to
confront the adverse effects of unemployment on feelings of life satisfaction

Many studies document a large negative effect of
unemployment on happiness. Recent research has looked into factors related to impacts on
happiness, such as adaptation, social work norms, social capital, religious beliefs, and
psychological resources. Getting unemployed people back to work can do more for their
happiness than compensating them for doing nothing. But not all unemployed people are
equally unhappy. Understanding the differences holds the key to designing effective
policies, for helping the unemployed back into work, and for more evenly distributing
the burden of unemployment resulting from economic restructuring.

Employers can use laboratory experiments to
structure payment policies and incentive schemes

Can a company attract a different type of
employee by changing its compensation scheme? Is it sufficient to pay more
to increase employees’ motivation? Should a firm provide evaluation feedback
to employees based on their absolute or their relative performance?
Laboratory experiments can help address these questions by identifying the
causal impact of variations in personnel policy on employees’ productivity
and mobility. Although they are collected in an artificial environment, the
qualitative external validity of findings from the lab is now well
recognized.

Why do different population groups (e.g. rural
vs. urban, youth vs. elderly and men vs. women) experience the same
objective labor status differently? One hypothesis is that people are more
concerned with relative deprivation than objective deprivation and they
value their own status relative to the status of their peers—the reference
group. One way to test this hypothesis in the labor market is to measure
individual differences in labor status while controlling for characteristics
that define population groups. This measure is called “relative labor
deprivation” and can help policymakers to better understand how labor claims
are generated.

Workers care about employers’ social causes, but
the public sector does not attract particularly motivated employees

Employees show more commitment to an employer
that promotes the greater good, and they work harder too. Moreover, many
people are willing to give up some of their compensation to contribute to a
social cause. Being able to attract a motivated workforce would be
particularly important for the public sector, but this goal remains elusive.
Indeed, there is evidence for the public sector that paying people more or
underlining the career opportunities (as opposed to the social aspects)
associated with public sector jobs is instrumental in attracting a more
productive workforce, without having a negative impact on intrinsic
motivation.

Gender quotas for women on boards of directors
improve female share on boards but firm performance effects are mixed

Arguments for increasing gender diversity on
boards of directors by gender quotas range from ensuring equal opportunity
to improving firm performance. The introduction of gender quotas in a number
of countries has increased female representation on boards. Current research
does not justify gender quotas on grounds of economic efficiency. In many
countries the number of women in top executive positions is limited, and it
is not clear from the evidence that quotas lead to a larger pool of female
top executives, who are the main pipeline for boards of directors. Thus,
other supplementary policies may be necessary if politicians want to
increase the number of women in senior management positions.

Firms need to tailor their allocation of talent
and responsibility, and their managerial structure, to fit their competitive
situation

Managers are supervising more and more workers,
and firms are getting flatter. However, not all firms have been keen on
increasing the number of subordinates that their bosses manage (referred to
as the “span of control” in human resource management), contending that
there are limits to leveraging managerial ability. The diversity of firms’
organizational structure suggests that no universal rule can be applied.
Identifying the factors behind the choice of firms’ internal organization is
crucial and will help firms properly design their hierarchy and efficiently
allocate scarce managerial resources within the organization.

Tournaments can outperform other compensation schemes such as
piece-rate and fixed wage contracts

Tournaments are commonly used in the workplace to determine
promotion, assign bonuses, and motivate personal development. Tournament-based contracts can
be very effective in eliciting high effort, often outperforming other compensation contracts,
but they can also have negative consequences for both managers and workers. The benefits and
disadvantages of workplace tournaments have been identified in an explosion of theoretical,
empirical, and experimental research over the past 30 years. Based on these findings,
suggestions and guidelines can be provided for when it might be beneficial to use tournaments
in the workplace.

A good boss can have a substantial positive
effect on the productivity of a typical worker. While much has been written
about the peer effects of working with good peers, the effects of working
with good bosses appear much more substantial. A good boss can enhance the
performance of their employees and can lower the quit rate. This may also be
relevant in situations where it is challenging to employ incentive pay
structures, such as when quality is difficult to observe. As such, firms
should invest sufficiently in the hiring of good bosses with skills that are
appropriate to their role.

Policies to help the unemployed can affect feelings of identity
and well-being, so measures need to be evaluated carefully

Unemployment not only causes material hardship but can also
affect an individual’s sense of identity (i.e. their perception of belonging to a specific
social group) and, consequently, feelings of personal happiness and subjective well-being.
Labor market policies designed to help the unemployed may not overcome their misery: wage
subsidies can be stigmatizing, workfare may not provide the intended incentives, and
flexicurity (a system that combines a flexible labor market with active policy measures), may
increase uncertainty. Policies aimed at bringing people back to work should thus take the
subjective well-being of the affected persons more into consideration.